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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Trump Bids Adieu to Paris Climate Agreement. What Does this Mean for Energy Investors?
June 5, 2017

Trump Bids Adieu to Paris Climate Agreement. What Does this Mean for Energy Investors?

Surprising no one, President Donald Trump announced his decision to withdraw the U.S. from the Paris climate agreement last week, highlighting the depth of his commitment to keep “America First.” Also surprising no one, the media is making much of the fact that the U.S. now joins only Nicaragua and Syria in refusing to participate in the accord.

Trump was under intense pressure from business leaders, politicians on both sides of the aisle, environmental activists, members of his Cabinet—even his own daughter Ivanka, reportedly—to stay in the agreement, but he made his decision with the American worker in mind. The Paris accord, Trump said, “is simply the latest example of Washington entering into an agreement that disadvantages the United States,” leaving American workers and taxpayers “to absorb the cost in terms of lost jobs, lower wages, shuttered factories and vastly demised economic production.”

This is the assessment of Secretary of Commerce Wilbur Ross, who went on Fox News to defend the decision. “Any time that people are taking money out of your pocket and you make them put it back in, they’re not going to be happy,” Ross said, making a similar argument to the one that prompted the Brexit referendum last year.

Just as many Brits were tired of following rules passed down from unelected officials in Brussels, many Americans have feared the encroachment of global environmentalists’ socialist agenda, which they believe threatens to usurp their freedom.

A thought-provoking article from FiveThirtyEight outlines how climate science became a partisan issue over the last 30 years in the U.S. It was the fall of the Soviet Union in the early 1990s, the article argues, that brought on a significant partisan shift in attitude, with conservative thinkers beginning to see the regulations that went along with environmentalism as the new scourge.

No, the Sky Isn’t Falling

Despite the withdrawal, I believe that the U.S. will not stop innovating and being a world leader in renewable energy—even while oil and natural gas production continues to surge. As the president himself said, we will still “be the cleanest and most environmentally friendly country on Earth.”

Recently I shared with you that we’re seeing record renewable capacity growth here in the U.S., with solar ranking as the number one source of net new electric generating capacity in 2016. In the first quarter of 2017, wind capacity grew at an impressive 385 percent over the same period last year. The “clean electricity” sector now employs more people in the U.S. than fossil fuel electricity generation, according to the 2017 Energy and Employment Report.

This was all accomplished not because of an international agreement but because independent communities, markets and corporations demanded it. Solar and wind turbine manufacturers will likely continue to perform well in the long term as renewable energy costs decline and battery technology improves.

Renewables Have Beaten Broader Energy Stocks
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Clearly people’s attitudes toward climate change—and its impact on business operations—are changing. This week, Exxon Mobil shareholders voted to require the company to disclose more information about how climate change and environmental regulations might affect its global oil operations. The energy giant—along with its former CEO, Secretary of State Rex Tillerson—favored staying in the climate deal.

At the same time, markets reacted positively to the exit, with the S&P 500 Index, Dow Jones Industrial Average and NASDAQ Composite Index all closing at record highs on Thursday following Trump’s announcement.

Major Indices Hit Record Highs Following US Withdrawl From Paris Agreement
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So What Does This Mean?

The question now is what investment implications, if any, the withdrawal might trigger.

The short answer is no one knows exactly what happens now. There’s already speculation that some countries might act to raise “carbon tariffs” on U.S. exports, increasing the cost of American-made goods “to offset the fact that U.S. manufacturers could make products more cheaply because they would not have to abide by Paris climate goals,” according to Politico. German chancellor candidate Martin Schulz has said that, should he be elected in September, he would refuse to “engage with the U.S. in transatlantic trade talks.” Schulz’s comments are not that far removed from those of his political rival, incumbent Angela Merkel, who called Trump’s decision “extremely regrettable.”

This has the potential to widen the rift that’s been forming between the U.S. and Germany since Trump took office. Recall that Trump refused to shake Merkel’s hand during her Washington visit in March. More recently, the president reportedly called the Germans “bad, very bad,” adding that he would stop them from selling millions of cars in the U.S.

One of the biggest winners of the withdrawal could be China. Just as the Asian giant is poised to benefit from the U.S. distancing itself from multilateral free-trade agreements such as NAFTA and the Trans-Pacific Partnership (TPP), it’s also in a position to brand itself as the world’s leader in renewable energy. Last week, Chinese Premiere Li Keqiang met with European Union (EU) officials in Brussels to discuss trade between the two world superpowers, but they also took the time to condemn the U.S. president’s actions, with European Council president Donald Tusk saying that the Paris agreement’s mission would continue, “with or without the U.S.”

Chinese Premiere Li Keqiang in Brussels in 2012

China might be the largest carbon emitter right now—it overtook the U.S. a decade ago—but it’s also the biggest investor in renewable energy generation, with $361 billion being spent between now and 2020. The country just fired up the world’s largest floating solar power plant in what used to be a coal mine, now flooded. The plant will provide as much as 40 megawatts (MW) of power to Huainan, China, home to more than 2.3 million people.    

European Manufacturers Have Strongest Jobs Growth in 20 Years

On the same day President Trump shared his decision, new purchasing manager’s index (PMI) data was released, and just like last month, European manufacturers were the big surprise. The EU manufacturing sector strengthened its expansion for the ninth straight month in May, reaching a 73-month high of 57, right in line with expectations. Jobs growth grew to an incredible 20-year high.

European Manufacturing Expands at Fastest Rate in 73 Months
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Germany led the group with a PMI of 59.5. Of the eight EU countries that are monitored, only Greece fell short of expansion.

 

The U.S., meanwhile, slipped from 52.8 in April to 52.7 in May, posting the weakest improvement in business conditions in eight months, before the election. China fared even worse, falling from 50.3 to 49.6, signaling a slight deterioration in its manufacturing sector for the first time in almost a year.

 

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every invest.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 03/31/2017: Exxon Mobil Corp., SolarEdge Technologies Inc., Vestas Wind Systems A/S, Gamesa Corp. Tecnologica SA, Sociedad Quimica y Minera de Chile.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

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5 Reasons to Consider Investing During This Summer Travel Season
June 1, 2017

The busy summer travel season is here yet again, and according to forecasts, this year could set a number of new records for airlines and highways. Thanks to a steadily improving economy, rising gross domestic product (GDP), strong consumer confidence and affordable airfare and fuel costs, more people than ever before are expected to fly on U.S. airlines and drive on the nation’s highways this summer.

Below are five reasons why this summer travel season could be a favorable one for investors.

1. Millions Leaving on a Jet Plane

a record 234.1 million passengers are expected to fly on U.S. airlines this summer

Airlines for America (A4A), the main airline industry trade group, projects a record 234.1 million people flying worldwide on U.S. carriers between June 1 and August 31. That figure’s up a healthy 4 percent from last summer.

To accommodate the 2.54 million expected daily passengers—100,000 more than normal—airlines will need to add an extra 123,000 seats a day.

2. Consumer Confidence and Satisfaction Up

The surge in air travel demand is a reflection of an improving domestic economy. Consumers are happy to spend their money right now, with the Consumer Confidence Index posting a 117.9 in May. Even though this is a couple of points below the April reading, optimism still stands at a historically high level.

U.S. Consumer Confidence Near All-Time High in May
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It doesn’t hurt that airfare is relatively affordable at the moment. According to big data firm Hopper, airfare to Europe should be a huge bargain this summer, down an expected 18 percent from last year on average.

Glowing customer satisfaction is another contributing factor to increased demand. The just-released J.D. Power 2017 North America Airline Satisfaction Study shows that passengers are more satisfied with their service than at any other time in the study’s 10-year history. Despite the regretful United Airlines incident in April, when a man was dragged from a Chicago flight bound for Louisville, overall satisfactory rose for a fifth consecutive year, reaching its highest level ever. For the 10th straight year, Alaska Airlines was ranked first among traditional carriers. Delta Air Lines, which we own in our All American Equity Fund (GBTFX), came in a close second.  

3. Rockin’ Down the Highway

Airline passengers won’t be the only ones enjoying an improved economy and low fuel costs this summer. More motorists than ever before are expected to make use of U.S. roads and highways, with 56 percent of Americans saying they plan on traveling more than 500 miles round trip, a 10 percent increase over last summer, according to GasBuddy.

Also pushing up travel expectations is what GasBuddy calls “a feat never before seen.” For the first time in recent memory, the price of gasoline at the beginning of the summer is nearly the same as it was at the beginning of the year. We normally see gas rise about 50 cents during the first five months of the year, but in 2017 it’s risen only 1.5 cents ($2.28 per gallon in January versus $2.30 in May). This should help encourage more Americans to splurge on a longer summer road trip.  

The Great American Summer Road Trip Getting Longer
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4. Appetite for Production

As a result, we expect to see another new high in gasoline consumption. During the summer months of 2016, gas consumption in the U.S. reached an average of 9.62 million barrels a day, surpassing the previous record of 9.57 million barrels a day set in the summer of 2007. With even more motorists taking longer road trips this year compared to last summer, we could see the amount edge closer to 10 million barrels a day.

This bodes well for oil and gas companies such as Phillips 66, Exxon Mobil and Valero, all held in our All American Equity Fund (GBTFX).

5. Vacation Had to Get Away

These airline and highway projections become even more likely to happen when we factor in that Americans are reportedly using more of their vacation time. According to Project: Time Off, an advocacy research initiative run by the U.S. Travel Association, American workers took an average 16.8 days off in 2016, up slightly from 16.2 days the previous year. Though the difference seems marginal, the additional 0.6 days added an extra $37 billion to the U.S. economy in 2016, creating an estimated 278,000 jobs.

So whether you plan on traveling by road or air this summer, you can probably expect to be accompanied by more people than in years past. This might lead to congestion and packed airports, but ultimately it’s a good opportunity for investors.

Seeking investment opportunities in domestic travel and consumer spending? Explore the All American Equity Fund (GBTFX) today!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the All American Equity Fund (GBTFX) as a percentage of net assets as of 3/31/2017: United Continental Holdings Inc. 0.00%, Delta Air Lines Inc. 1.40%, Phillips 66 1.75%, Exxon Mobil Corp. 2.17%, Valero Energy Corp. 2.23%.

Administered by the Conference Board, the Consumer Confidence Index (CCI) measures how optimistic or pessimistic consumers are with respect to the economy in the near future. The idea behind the Index is that if consumers are optimistic, they tend to purchase more goods and services.

The J.D. Power 2017 North America Airline Satisfaction Study measures passenger satisfaction among both business and leisure travelers, and is based on responses from 11,015 passengers who flew on a major North American airline between March 2016 and March 2017. The study was fielded between April 2016 and March 2017.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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5 Things You Need to Know from Last Week (Look What Gold Just Did!)
May 30, 2017

Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe

It was a whirlwind week. After attending two big conferences, I landed in Vancouver Friday where I presented at the International Metal Writers Conference. Markets continued to close at record highs, even as political uncertainty remained and the threat of terrorism loomed large over Western nations. Last Monday, gold flashed a bullish signal we haven’t seen in over a year.

There’s much to talk about! Below are five things you need to know from the week now behind us.

1. Quants Now Control Wall Street

A special report by the Wall Street Journal last week confirmed what I’ve been saying for a while: Wall Street is now run by the quantitative analysts, or quants. Numbered are the days when traders and fund managers picked stocks on gut instinct. Today, a decision is made only after whole oceans of data have been processed using sophisticated algorithms.

And yet quants’ role has even further room to expand. As the WSJ reports, quant hedge funds now represent 27 percent of all U.S. stock trades by investors, up from 14 percent in 2013.

To get some idea of the type of analysis quants conduct, take a look at the matrix below. Of course, their methods are far more sophisticated, their data crunched in a matter of nanoseconds, but it’s helpful to see how they might codify many points of data.

Investment analysis decision matrix

We aspire to conduct the same sort of analysis, from technical to tactical, to make better, more strategic investment decisions.

2. Paul Singer Says It’s Time to Build Up Some Dry Powder

Paul Singer

Last week at a Chief Executives Organization (CEO) event, I had the privilege of hearing billionaire hedge fund manager Paul Singer speak. His firm, Elliott Management, has one of the most impressive long-term track records, generating a compound annual growth rate (CAGR) of 13.5 percent since its inception in 1977, with only two down years.

Elliott Management currently manages close to $33 billion—not including the $5 billion it raised this month in as little as 24 hours. Yes, billion with a b. Singer, suggesting a potential investment opportunity in distressed stocks could soon open up, recently called on investors to commit a fresh infusion of cash. The resultant $5 billion in dry powder, the most ever raised in the firm’s history, is expected to be deployed at some later date.

Singer continues to be a huge advocate for gold. At the event, he mentioned that he still holds the yellow metal, noting its attractive diversification benefits. This is in line with what I frequently say: You’re unlikely to get rich investing in gold, but as a diversifier it helps to reduce some of the volatility in your portfolio. I like to recommend a 10 percent weighting in gold—5 percent in bars and coins, the other 5 percent in gold stocks—with annual rebalances.

Gold posted a “golden cross” last week, which is what happens when the 50-day moving average climbs above the 200-day moving average, often seen as a bullish move.

gold posts a golden cross
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The metal is up about 10 percent year-to-date on a weaker U.S. dollar, which has declined more than 5.5 percent over the same period.

 

3. BBH: Just Say No to Overdiversification

Diversification can sometimes help minimize volatility, but too much of it can lead to mediocre returns. That was the main theme of another speaker at the CEO event, this one from Brown Brothers Harriman (BBH), one of the largest private banks in the U.S. BBH research shows that, if your investment goal is to get rich, a highly-concentrated portfolio is the surest way to achieve it. An S&P 500 Index fund, while possibly delivering positive returns, is unlikely to make anyone a millionaire.

This is good to know, but the problem is that most investors can’t stomach the volatility inherent in a portfolio that holds only a few assets. With minimal diversification, daily swings can be dizzying. Professional money managers and investment banks such as BBH know how to use this volatility to their advantage, but for everyone else, it’s prudent to be diversified in gold, municipal bonds and other assets often seen as havens.

For more on how to deal with market volatility, download my whitepaper, “Managing Expectations.”

4. Want Volatility? Look No Further Than Bitcoin

Markets watched in amazement last week as bitcoin, the online-only currency, soared to a fresh high of $2,740, more than twice the value of an ounce of gold. On Thursday alone, it traded within a $510 range, underscoring the nearly 10-year-old cryptocurrency’s high levels of volatility and speculation.

Bitcoin's meteoric rise
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Some bitcoin analysts forecast even higher gains, while others see the formation of a bubble they liken to the dotcom crash of the late 1990s and early 2000s. Since only March, when it surpassed gold, the digital currency has doubled in value.

These were among some of the discussions at Consensus, a bitcoin technology conference, which I also attended last week in New York. One of the highlights of the conference was hearing from Fidelity CEO Abigail Johnson, who surprised many attendees by embracing the digital currency and supporting its growth. I admire Johnson, head of a traditional financial firm, for recognizing the fact that bitcoin is already disrupting our industry and will likely continue to do so for some time. Not only does Fidelity now allow its workers to buy their lunches using bitcoin, but there are also plans to make it possible for clients to see and manage their bitcoin assets.

Paul Singer

Fidelity isn’t the only firm trying to position itself as a bitcoin pioneer. Both Nasdaq and the Chicago Mercantile Exchange (CME) were sponsors of the conference, indicating cryptocurrencies’ gradual shift from fringe curiosity to legitimate speculative asset.

I was shocked to learn that there are now somewhere in the neighborhood of 700 cryptocurrencies, all of them locked in a race to see which ones will come out on top. They’re collectively up more than 400 percent so far this year, the market having risen from $17.6 million in January to $88 million today, according to cryptocurrency and blockchain technology news site CoinDesk.

To “mint” a new cryptocurrency, I learned, speculators raise capital not through conventional means but through crowdfunding, like a 21st century Gold Rush. All regulatory oversight and governance is therefore bypassed. The currency is then issued in an initial coin offering (ICO), after which it can be “mined” using powerful, energy-hogging computers. Naturally, the cheaper the electricity, the better. The hunt for the world’s cheapest kilowatt hour has taken “miners” all over the globe, from parts of Russia to Iceland to Finland to rural China.

5. Make American Wheat Great Again

America wheat on top

It looks as if wheat exporters are great again. After being displaced by Russia in August 2016, the U.S. has regained its title as the world’s top exporter of the grain—for now. Interestingly enough, the investigation into possible collusion between Donald Trump’s campaign and Russia has driven the U.S. dollar’s devaluation since the start of the year, which in turn has made U.S. exports cheaper for overseas buyers. Egypt, Algeria, Mexico and Japan all reportedly increased their purchase amounts of American wheat.

U.S. once agin the world's top wheat exporter. But for how long?
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Two years ago, it was the Russian ruble’s weakness—prompted by the dramatic decline in oil prices and international sanctions following Russia’s occupation of Ukraine—that gave Russian exporters an edge. Coupled with a bumper crop, the country outpaced both the U.S. and European Union, then the leader.

As I said earlier, the dollar has declined 5.5 percent year-to-date, helping to give American exporters an edge. According to Bloomberg, the U.S. is expected to ship more than 28 million metric tons of wheat this season, an increase of 34 percent compared to the same time last year.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Diversification does not protect an investor from market risks and does not assure a profit.

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Here’s Why I Think Renewable Energy Is Finally Living up to Hype
May 26, 2017

Renewables Energy

Global markets have steadily been adding renewables such as wind and solar to their energy mix for several years now, but according to a handful of new reports, 2016 might have been the tipping point. Not only did the world add a record level of renewable energy capacity last year, but it did so at a significantly lower cost compared to 2015. In the U.S., wind and solar both had a knockout year, the latter of which ranked number one in terms of new capacity growth, ahead of fossil fuels. 

Investors who might have overlooked this growing industry probably can’t afford to do so any longer. After several years of hype and false starts, renewable energy is finally starting to hit its stride.

Among our favorite energy stocks right now are SolarEdge Technologies, up more than 50 percent year-to-date as of May 24; Vestas Wind Systems, the largest wind farm manufacturer in the world, up 33 percent; Siemens Gamesa, up 27 percent; and Sociedad Química y Minera de Chile (SQM), one of the world’s top three lithium producers, up 26 percent. (Lithium is used to manufacture lithium-ion batteries.) We own these names, among other renewables, in our Global Resources Fund (PSPFX), which is currently overweight renewables. Note they are all outperforming the broader S&P 500 Energy Index, down 11 percent.

Renewables Have beaten broader energy stocks
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We find these companies attractive because their revenue is dependent not necessarily on new orders but on existing service agreements. It’s much like a car dealership. It may sell you a car at cost, but you must commit to allowing the dealer to service said car. This, of course, helps generate long-term revenue.

In the days following the November election, SolarEdge, Vestas and other “green” stocks contracted on fears that the incoming Donald Trump administration would heavily curtail the incentives for renewable capacity additions in the U.S. Ben Kallo, an analyst at Robert W. Baird, warned investors on November 9 that he expected “a significant overhang on solar stocks due to negative sentiment trades and oversupply in the industry.”

We saw the pullback as a prime buying opportunity, and we continued to accumulate renewables knowing that the underlying service portion of revenue is solid and stable. The bet was well-made. Our renewables allocation is now a core driver of PSPFX’s performance this year, as you can see here.

Renewables Grew at Record Pace in 2016

It’s no secret that President Trump prefers policies that favor coal and other fossil fuels—which we also invest in—but markets are demanding diversification into renewables as costs decline and battery technology improves. According to a new report commissioned by UN Environment’s Economy Division, 2016 saw record installation of new renewable capacity, totaling 138.5 gigawatts (GW), up 9 percent from the previous year. This was achieved despite total investments falling 23 percent to $241.6 billion on lower costs.

Even more notable is that investment in new renewable energy capacity was double that in coal, gas and other fossil fuels during the year.

Demand is being driven not just by government-subsidized clean energy initiatives. Corporations are finding that renewables can, in many cases, be cheaper than nonrenewables. Bloomberg reported last month that 190 Fortune 500 companies collectively managed to save as much as $3.7 trillion in 2016 through emission-reducing projects.

This has led to record capacity growth in solar and wind here in the U.S. In its 2016 review, the Solar Energy Industries Association (SEIA) reports that the country nearly doubled its capacity during the year after installing 14.8 GW of solar photovoltaic (PV) cells. A record 22 states each added more than 100 megawatts (MW), and for the first time ever, solar ranked as the number one source of new electric generating capacity at 39 percent, followed by natural gas (29 percent) and wind (26 percent).

in 2016, solar ranked as the #1 source of new electric generating capacity in the U.S
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As for wind, the U.S. added 2,000 MW in the first quarter of 2017, an incredible 385 percent increase from the same time last year, according to the American Wind Energy Association (AWEA). As many as 41 states, not including Puerto Rico and Guam, now have utility-scale wind projects, with U.S. Global Investors’ home state of Texas the leader by far. The Lone Star State currently has over 21,000 MW of installed capacity—more than Canada and Australia combined—followed at a distant second by Iowa, with nearly 7,000 MW.

U.S. Installed wind power capacity, by state
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If you recall, I highlighted wind energy capacity as one of the “11 Reasons Why Everyone Wants to Move to Texas.”

Home to parts of the Permian Basin, Eagle Ford Group and other high-density oilfields, Texas has the most proven reserves, with more than a third of all U.S. crude oil reserves. Nevertheless, the state’s wind electric generation industry employs nearly three times as many people as oil, coal and natural gas generation combined, according to data provided by the U.S. Department of Energy. 

China and India—40 Percent of World’s Population—Leading Growth

According to the Financial Times, it’s normally taken between 50 and 60 years for the world to transition from one dominant fuel source to another—think the shift from wood to coal in the 1800s. The transition we’re seeing now is different in that it’s happening at a much more accelerated rate than in the past. Many experts speculate whether the 21st century will be the last one to see widespread use of coal, gas and other nonrenewables.

It’s important to recognize where sentiment is headed. As costs fall and battery technology improves, more and more governments and corporations will demand that renewables make up a larger share of their energy mix.

Consider China. The Asian giant is done messing around with smog and pollution, so its capacity additions going forward look very positive. India, meanwhile, is at the start of “the largest energy transformation project in the world,” as organizers of the recent Vienna Energy Forum put it. Now mostly powered by coal, India will soon be installing 50 percent more solar and wind capacity than the U.S. currently has.

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

 

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by the Global Resources Fund 3/31/2017: SolarEdge Technologies Inc. (1.25%), Vestas Wind Systems A/S (1.54%), Gamesa Corp Tecnologica SA (1.30%), Sociedad Química y Minera de Chile (1.22%).

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Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe
May 22, 2017

Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe

Europe is back on the map. That was one of the main takeaways last week from the SkyBridge Alternatives (SALT) hedge fund conference in Las Vegas, where $3 trillion in assets was represented. Speaker after speaker touted European equities for their attractive valuations and as a means to diversify away from the volatile American market in light of rising U.S. geopolitical risk. France’s election of centrist Emmanuel Macron over far-right nationalist Marine Le Pen this month has especially eased investors’ fears that antiestablishment forces would challenge the integrity of the European Union (EU).

Economic growth is finally picking up in Europe—“solid and broad,” as European Central Bank (ECB) president Mario Draghi recently put it—and many countries’ purchasing managers’ indexes (PMIs) are at five- and six-year highs. Export orders and hiring have accelerated. Labor participation is improving. European commodity sectors, including energy and metals, look cheap and oversold, meaning it might be time to start accumulating.

Trading at around 17 times earnings, European companies are priced to move compared to American firms, which are trading at 22 times earnings.

European Stocks Have an Attractive Dividend Yield

Dividend yields also look attractive relative to U.S. stocks. The MSCI Emerging Europe Index, which is most heavily weighted in Russian, Polish and Turkish stocks, currently yields 3.2 percent. The S&P 500 Index, by comparison, yields 2 percent.

A recent Barron’s article, “Europe on Sale: Time to Buy Foreign Stocks,” makes the same bullish case as many of the SALT presenters. Its author, Vito J. Racanelli, suggests that the eight-year bull run in the U.S. could be coming to an end, and that the baton is being passed to Europe. Overseas markets have already attracted more fund flows so far this year than the U.S. market, with a whopping $6.1 billion being plowed into European equity funds in the week ended May 10.

“Given attractive valuations, diminished political risk, low interest rates and a pickup in global growth, international markets, and Europe in particular, could finally start to outperform,” Racanelli writes.

 

 

Talking Geopolitics

Before moving on, I want to share a few other takeaways from SALT. One of the highlights was hearing billionaire investor Dan Loeb, who manages the $16 billion hedge fund firm Third Point. Loeb said that serious investors should closely monitor geopolitics as a backdrop or overlay when making investment decisions because government policy can have the fastest and most significant impact on your portfolio.

Daniel S. Loeb

That was flattering to hear. Not only do I spend a lot of time discussing and analyzing geopolitics, both here in the weekly commentary and my CEO blog Frank Talk, but it’s baked right into U.S. Global Investors’ methodology: Our investment process clearly asserts that “government policy is a precursor to change.” Loeb’s comments, I felt, validated our emphasis on geopolitics.

Many conferences I attend can often get bogged down in partisan politics, but SALT was refreshingly balanced. Joe Biden was as welcome on-stage as Jeb Bush. No one came out entirely in favor of or against President Donald Trump or his policies. Instead, presenters discussed the inherent risks and opportunities in an intelligent, even-handed manner. I aspire to do the same.

One of the speakers was John Brennan, the former CIA director, who’s scheduled to testify before the House Intelligence Committee later this month as part of its investigation into Russia’s alleged involvement with the 2016 election. Brennan, who told lawmakers as far back ago as August that the agency had information pointing to possible collusion between Russia and the Trump campaign, shed some much-needed light on allegations that Trump shared sensitive intelligence with Russian officials this month—a “serious mistake,” he said—explaining that such leaks to the media are potentially just as damaging to national security as the president’s actions.

Also notable was former Federal Reserve Chair Ben Bernanke’s thoughts on Washington’s little-known power dynamics. He said there are really three parties jockeying for control in the capital—Republicans, Democrats… and the “beltway party.” It’s this last group, composed of deeply entrenched lobbyists and career bureaucrats, that gives Washington outsiders such as Trump the hardest time and actively tries to sabotage agendas that shake up the status quo.

Trump's young presidency closely resembles Jimmy Carter's

In this regard, Bernanke said, the presidency Trump’s tenure so far resembles the most is not Richard Nixon’s, as some have suggested. It’s not even Andrew Jackson’s, which Trump himself expressly would like to emulate. Instead, it’s Jimmy Carter’s.

This might seem counterintuitive, but think about it: Both men were Washington outsiders. Both men arrived in the beltway with aspirations to transform the capital’s insular culture and “drain the swamp.” Both men had the great fortune of working with a party majority in both chambers of Congress. But because they exuded an “I alone” attitude and often picked fights with members of their own party, both men faced unusual difficulties in getting key components of their agendas passed. And just as Carter had little success in his first 100 days—in his entire four-year term, in fact—Trump’s young presidency has similarly been unable to make significant strides so far in getting much accomplished.

A White House in Crisis?

This is precisely what markets were reacting to last Wednesday, the worst week for major U.S. indices in months. Investors, fearing Trump’s pro-growth agenda could be threatened by troubling news and allegations coming out of the White House, punished small-cap stocks in particular, sending the Russell 2000 Index down 2.62 percent, its sharpest one-day loss since March. Recall that it was small caps that saw the strongest surge following the election, as investors bet on domestic growth stemming from the then-president-elect’s “American first” proposals.

the importance of diversification
click to enlarge

Now, however, some are wondering if Trump, embroiled in numerous scandals, will finish out his term. A few SALT presenters even uttered the “i” word. Jim Chanos, founder and investment manager of Kynikos Associates in New York, told the packed auditorium that he believes the market hopes Vice President Mike Pence will become president. Investors are seeking deregulation and tax cuts, plain and simple, Chanos said, and the “more stable” Pence is seen as having a better shot at delivering. This squares with reports from British gambling and betting company Ladbrokes, which announced last week that Trump is now odds-on, or highly likely, to face impeachment by the end of his first term, with bookies having to cut the price from 11/10 to 4/5.   

Banks, which stand to benefit from Trump’s plan to loosen financial regulations, were Wednesday’s biggest losers. JPMorgan was down 3.81 percent, or $3.34 a share. Goldman Sachs fell 5.27 percent, or $11.88 a share.

Apple finished the day down 3.36 percent, wiping away some $20 billion in market value. The smartphone giant, which recently became the first company ever to be worth more than $800 billion, could also benefit from Treasury Secretary Steven Mnuchin’s efforts to make it easier for multinationals to repatriate cash that’s held overseas. And if that describes any company today, it would be Apple: The iPhone-maker holds nearly $250 billion in cash and securities in offshore accounts.  

 

Dollar Weakness Gives a Boost to Gold

More so than equities, the U.S. dollar is highly sensitive to geopolitical drama. Last week, the greenback tumbled to its lowest level since the November election compared to other major currencies.

U.S. Dollar Gives up its post-election gains
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This helped gold, miners and commodities end the week in positive territory. Gold gained 2 percent, gold miners 0.57 percent and commodities 1.36 percent. The S&P 500, meanwhile, finished the week down 0.8 percent.

For diversification benefits, I always recommend around a 10 percent weighting in gold and gold stocks, and last week proved yet again that this strategy could help mitigate the losses in risk assets.

Unsure what else drives the price of gold? Find out!

 

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The MSCI Emerging Markets Europe Index captures large and mid-cap representation across 6 Emerging Markets (EM) countries in Europe. With 83 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

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Share “Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe”

Net Asset Value
as of 10/19/2017

Global Resources Fund PSPFX $5.81 -0.03 Gold and Precious Metals Fund USERX $7.92 -0.01 World Precious Minerals Fund UNWPX $6.33 -0.04 China Region Fund USCOX $11.35 -0.21 Emerging Europe Fund EUROX $7.03 -0.04 All American Equity Fund GBTFX $24.27 -0.02 Holmes Macro Trends Fund MEGAX $20.79 No Change Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change